Royale Business School

PGDM II (2010-12)

Project on VAT Subject of CPT

Submitted to Prof. Pinkal shah

Submitted by:Aelis Rabara

Parth shastri Sahil Bloch Ratnesh Dubey

Value Added Taxes (VAT)
Value Added Tax (VAT) is nothing but a general consumption tax that is assessed on the value added to goods & services. It is the indirect tax on the consumption of the goods, paid by its original producers upon the change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the value of the goods, added by the transferor. It is the tax in relation to the difference of the value added by the transferor and not just a profit. All over the world, VAT is payable on the goods and services as they form a part of national GDP. More than130 countries worldwide have introduced VAT over the past 3 decades; India being amongst the last few to introduce it. It means every seller of goods and service providers charges the tax after availing the input tax credit. It is the form of collecting sales tax under which tax is collected in each stage on the value added of the goods. In practice, the dealer charges the tax on the full price of the goods, sold to the consumer and at every end of the tax period reduces the tax collected on sale and tax charged to him by the dealers from whom he purchased the goods and deposits such amount of tax in government treasury. VAT is a multi-stage tax, levied only on value that is added at each stage in the cycle of production of goods and services with the provision of a set-off for the tax paid at earlier stages in the cycle/chain. The aim is to avoid 'cascading', which can have a snowballing effect on the prices. It is assumed that because of cross-checking in a multi-staged tax; tax evasion would be checked, hence resulting in higher revenues to the government.

Importance of VAT in India

India, particularly being a trading community, has always believed in accepting and adopting loopholes in any system administered by State or Centre. If a well-administered system comes in, it will not only close options for traders and businessmen to evade paying their taxes, but also make sure that they'll be compelled to keep proper records of sales and purchases. Under the VAT system, no exemptions are given and a tax will be levied at every stage of manufacture of a product. At every stage of value-addition, the tax that is levied on the inputs can be claimed back from tax authorities.

Advantages of VAT
1. Coverage -If the tax is considered on a retail level, it offers all the economic advantages of a tax of the entire retail price within its scope. The direct payment of tax spreads out over a large number of firms instead of being concentrated only on particular groups, such as wholesalers & retailers.

2. Revenue Security - Under VAT only buyers at the final stage have an interest in undervaluing their purchases, as the deduction system ensures that buyers at earlier stages are refunded the taxes on their purchases. Therefore, tax losses due to undervaluation will be limited to the value added at the last stage. Secondly, under VAT, if the payment of tax is avoided at one stage nothing will be lost if it is picked up at later stage. Even if it is not picked up later, the government will at least have collected the VAT paid at previous stages. Where as if evasion takes place at the final/last stage the state will lose only tax on the value added at that particular point. 3. Selectivity - VAT is selectively applied to specific goods & business entities. In addition, VAT does not burden capital goods because of the consumption-type. VAT gives full credit for tax included on purchases of capital goods. 4. Co-ordination of VAT with direct taxation - Most taxpayers cheat on sales not to evade VAT but to evade their personal and corporate income taxes. Operation of VAT resembles that of the income tax and an effective VAT greatly helps in income tax administration and revenue collection.

Disadvantages of VAT
1. 2. 3. 4. VAT is regressive VAT is difficult to operate from position of both administration and business VAT is inflationary VAT favors capital intensive firms

Items covered under VAT

All business transactions that are carried on within a State by individuals/partnerships/ companies etc. will be covered under VAT. More than 550 items are covered under the new Indian VAT regime out of which 46 natural & unprocessed local products will be exempt from VAT Nearly 270 items including drugs and medicines, all industrial and agricultural inputs, capital goods as well as declared goods would attract 4 % VAT in India. The remaining items would attract 12.5 % VAT. Precious metals such as gold and bullion will be taxed at 1%. Petrol and diesel are kept out of the VAT regime in India.

Tax implication under Value Added Tax Act Selling Price (Excluding Tax)

Seller

Buyer

Tax Rate

Invoice value (InclTax)

Tax Payable

Tax Credit

Net TaxOutflow

100

4% CST

104

4.00

114

12.5% VAT

128.25

14.25

0*

14.25

124

12.5% VAT

139.50

15.50

14.25

1.25

Consumer

134

12.5% VAT

150.75

16.75

15.50

1.25

Total to Govt.

VAT CST

16.75 4.00

Silent Features Of VAT

a. Rate of Tax VAT proposes to impose two types of rate of tax mainly:

b.

c.

d.

e. f.

4% on declared goods or the goods commonly used. 10-12% on goods called Revenue Neutral Rates (RNR). There would be no fall in such remaining goods. o Two special rates will be imposed-- 1% on silver or gold and 20% on liquor. Tax on petrol, diesel or aviation turbine fuel are proposed to be kept out from the VAT system as they would be continued to be taxed, as presently applicable by the CST Act. Uniform Rates in the VAT system, certain commodities are exempted from tax. The taxable commodities are listed in the respective schedule with the rates. VAT proposes to keep these rates uniform in all the states so the goods sold or purchased across the country would suffer the same tax rate. Discretion has been given to the states when it comes to finalizing the RNR along with the restrictions. This rate must not be less than 10%. This will ensure By doing this that there will be level playing fields to avoid the trade diversion in connection with the different states, particularly in neighbouring states No concession to new industries Tax Concessions to new industries is done away with in the new VAT system. This was done as it creates discrepancy in investment decision. Under the new VAT system, the tax would be fair and equitable to all. Adjustment of the tax paid on the goods purchased from the tax payable on the goods of sale All the tax, paid on the goods purchased within the state, would be adjusted against the tax, payable on the sale, whether within the state or in the course of interstate. In case of export, the tax, paid on purchase outside India, would be refunded. In case of the branch transfer or consignment of sale outside the state, no refund would be provided. Collection of tax by seller/dealer at each stage. The seller/dealer would collect the tax on the full price of the goods sold and shows separately in the sell invoice issued by him VAT is not cascading or additive though the tax on the goods sold is collected at each stage, it is not cascading or additive because the net effect would be as follows: - the tax, previously paid on the sale of goods, would be fully adjusted. It will be like levying tax on goods, sold in the last state or at retail stage.

o o

Advantages Of VAT
1. Simplification Under the CST Act, there are 8 types of tax rates- 1%, 2%, 4%, 8%, 10%, 12%, 20% and 25%. However, under the present VAT system, there would only be 2 types of taxes 4% on declared goods and 10-12% on RNR. This will eliminate any disputes that relate to rates of tax and classification of goods as this is the most usual cause of litigation. It also helps to determine the relevant stage of the tax. This is necessary as the CST Act stipulates that the tax levies at the first stage or the last stage differ. Consequently, the question of which stage of tax it falls under becomes another reason for litigation. Under the VAT system, tax would be levied at each stage of the goods of sale or purchase. 2. Adjustment of tax paid on purchased goods Under the present system, the tax paid on the manufactured goods would be adjusted against the tax payable on the manufactured goods. Such adjustment is conditional as such goods must either be manufactured or sold. VAT is free from such conditions. 3. Further such adjustment of the purchased goods would depend on the amount of tax that is payable. VAT would not have such restrictions. CST would not have the provisions on

4.

5. 6.

7.

8.

refund or carry over upon such goods except in case of export goods or goods, manufactured out of the country or sale to registered dealer. Similarly, on interstate sale on tax-paid goods, no refund would be admissible. Transparency The tax that is levied at the first stage on the goods or sale or purchase is not transparent. This is because the amount of tax, which the goods have suffered, is not known at the subsequent stage. In the VAT system, the amount of tax would be known at each and every stage of goods of sale or purchase. Fair and Equitable VAT introduces the uniform tax rates across the state so that unfair advantages cannot be taken while levying the tax. Procedure of simplification Procedures, relating to filing of returns, payment of tax, furnishing declaration and assessment are simplified under the VAT system so as to minimize any interface between the tax payer and the tax collector. Minimize the Discretion the VAT system proposes to minimize the discretion with the assessing officer so that every person is treated alike. For example, there would be no discretion involved in the imposition of penalty, late filing of returns, non-filing of returns, late payment of tax or non payment of tax or in case of tax evasion. Such system would be free from all these harassment Computerization the VAT proposes computerization which would focus on the tax evaders by generating Exception Report. In a large number of cases, no processing or scrutiny of returns would be required as it would free the tax compliant dealers from all the harassment which is so much a part of assessment. The management information system, which would form a part of integral computerization, would make the tax department more efficient and responsive.

VAT In Gujarat
Why VAT?

More equitable - tax burden is shared by all dealers. More transparent - easy procedures and only two rates, broadly speaking. Simpler- easy computation and easy compliance. Credit for input taxation - cost efficiency. Better Compliance - through self-policing. Prevents cascading effect - through input rebate. Avoids distortions in trade and economy - uniform tax rates.

Who pays VAT?

All dealers registered under VAT. All dealers with an annual turnover of more than Rs. five lacs shall register for VAT. Dealers with turnovers less than Rs. five lacs may register voluntarily. Dealers having annual turnovers between Rs. five lacs and twenty-five lacs may opt for a simple composition tax at a nominal. Rate in place of VAT.

How to calculate VAT?

VAT is calculated by deducting tax credit from tax collected during the payment period. Example: (Rate of tax assumed at 10%). Purchase Price Rs. 100. Tax paid on purchase Rs. 10(input tax). Sale Price Rs. 150. Tax payable on sale price Rs. 15(output tax). Input tax credit Rs. 10. VAT payable Rs. 5. Total tax collection by govt. On the sale price of Rs. 100 paid on the purchase by the dealer Rs. 10. Net VAT paid by the dealer on value addition after resale Rs. 5. Total tax at 10% on the last sale price of RS. 150 Rs. 15.

How to pay VAT?

VAT will be paid along with monthly returns. Credit will be given within the same month for entire VAT paid within the state on purchase of inputs and goods. Credit thus accumulated over any month will be utilized to deduct from the tax collected by the dealer during that month. If the tax credit exceeds the tax collected during a month on sale within the state, the excess credit will be carried forward to the next month.

Which goods will be taxable under VAT?

All goods except those specifically exempt.

What types of input tax are eligible for VAT credit?

Input tax credit is given for entire VAT paid within the state on purchases of taxable goods meant for resale/manufacture of taxable goods. Input credit excludes purchases: from unregistered dealers from other states/countries of goods used in manufacture of exempted goods of capital goods goods used as fuel in power generation of goods to be dispatched as branch transfers outside Gujarat of goods used in manufacture of goods to be dispatched outside Gujarat as branch transfer/consignments and in cases where the dealer does not have invoices showing amounts of tax charged separately by the selling dealer.

What to expect under VAT (Recommendations of the VAT Advisory Committee)

Number of tax rates should not exceed two. Tax exemptions on food grains, vegetables, fruits and processed milk. 4% tax on essential goods, declared goods, capital goods and industrial inputs. Special rate of 1% on gold and silver and articles thereof. Current system to continue for diesel and petrol. All other goods to be taxed on the basis of revenue neutrality.

What will happen to the Sales Tax Act?

Continues for the pending assessments, appeals and recoveries. Continues for certain commodities as Govt. may decide.

What about the Bombay Sales of Motor Spirits Taxation Act, 1958?
It may continue for a few years and VAT will exclude HSD (diesel), motor spirits (petrol) and ATF (aviation fuel) initially.

What will be the status of the industries enjoying sales tax exemption and deferment?
The matter is under consideration of the government. Industrial incentives in the form of exemption and deferment of sales tax may have to be continued under VAT as they are commitments made by the government. The units may get certain options.

What will happen to the Central Sales Tax?

In an ideal VAT regime there is no room for CST. To begin with, the GOI is contemplating certain amendments in the CST.

What else will VAT cover?

The GOI is contemplating to empower states to collect VAT on considerable number of services as well as on goods on which AED (additional excise duty) is levied.